Despite intensifying backlash and increasing concerns about scoring and where proceeds are going, borrowers are rushing to sustainable bonds.
That could signal opportunity for investors considering exchange traded funds such as the Calvert Ultra-Short Investment Grade ETF (NYSE Arca: CVSB). CVSB is just four months old, but it’s a pertinent fixed income option. It’s especially useful when some market observers believe that issuance of ESG debt will topple records set in 2021.
Green bonds are bonds that finance environmentally friendly projects. CVSB doesn’t focus on those specific bonds. However, rising issuance in that corner of the bond market could signal broader investor demand for sustainable fixed income strategies.
“More borrowers are issuing labeled bonds to help fund their sustainable business practices and to capitalize on investor demand for the debt, with Europe, the Middle East and Africa the most active, according to the banker. The size of investor orders is often higher for ESG bonds compared to conventional notes and the ability for the price to potentially tighten is greater,” reported Bloomberg, citing Susan Barron, global head of sustainable capital markets at Barclays.
Increased demand for debt that merits the ESG classification could provide support to ETFs such as CVSB following a decline in sustainable bond issuance in 2022.
Sustainable Bonds Strategies: Right Place, Right Time?
In terms of CVSB, the new ETF could be appealing to investors on multiple fronts. For starters, the fund is actively managed. That means it can avoid bonds with dubious ESG credentials and those that potentially pose credit risk to investors.
That could position CVSB to capitalize on an increasingly receptive audience regarding sustainable debt. At least, it could with appropriately scored bonds.
“New sales of green, social, sustainability and sustainability-linked bonds totaled $83.4 billion last month, making it the most active April since the inception of the green debt market in 2007, according to data compiled by Bloomberg. Sales of green bonds, the largest category of sustainable debt by amount, reached $52.4 billion, also a record for April,” reported David Mutua for the news service.
Another point in CVSB’s favor is a duration of just 0.67 years. That’s an advantage because if Treasury yields suddenly spike, the ETF is unlikely to incur significant punishment.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.